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The Employee Ownership Update

Loren Rodgers

January 3, 2013

(Loren Rodgers)

New Tax Rules Could Make ESOPs More Attractive

Starting in 2013, business owners selling their companies will face significantly higher taxes on the sale proceeds. Appropriately structured sales to ESOPs allow sellers to defer capital gains taxes, and higher rates will make that deferral more valuable.

Under the American Taxpayer Relief Act of 2012 (the "fiscal cliff" legislation signed on January 2, 2013), capital gains tax rates will rise from 15% to 20% for single filers with incomes of more than $400,000 and joint filers with incomes of more than $450,000, which would include most sellers. In addition, under the Health Care and Education Reconciliation Act of 2010, as of 2013 an additional 3.8% Medicare surtax will be imposed on certain investment income received by high-income filers.

A more complex effect arises from the so-called "Pease" limit, which, as revived under the American Taxpayer Relief Act, reduces itemized deductions by 3% of the amount of adjusted gross income of $250,000 for single filers and $300,000 for joint filers. The overall reduction in itemized deductions cannot exceed 80%. It is estimated this could add another 1% to tax costs, meaning just at the federal levels the total taxes could be as high as 24.8%. State taxes are in addition to this. In California, state taxes could be as high as an additional 10.3%.

Casino Queen Becomes ESOP-Owned

The 700-employee Casino Queen, based in East St. Louis, IL, announced on December 27 that it had agreed to become 100% ESOP-owned in a transaction involving a $171 million loan. The Illinois Gaming Board voted to approve the sale on December 20, allowing the Casino Queen ESOP to buy the shares of an investor group led by Jim Koman. The "Home of the Loosest Slots," just across the Mississippi River from downtown St. Louis, had gaming revenue of $121 million for the first 11 months of 2012, which is slightly higher than 2011, but one-third less than 2007, its best year. Jeff Watson, who will be the company's president and an ESOP trustee, said, "The leaders of the Casino Queen recognize that the best place to put the future of the company is in the hands of its very talented employees who have made it a success. Profits generated by the Casino Queen will now stay in the community and directly benefit our workforce."

Senator Portman Appointed to Finance Committee

Senator Rob Portman (R-OH), who was an architect of legislation supporting S corporation ESOPs while a member of the House Ways and Means Committee, has been appointed to the Senate Finance Committee, where he joins his former House colleague and now Senator Ben Cardin (D-MD). Portman and Cardin led bipartisan efforts on retirement policy, and they are expected to do the same in the Senate. The Senate Finance Committee write tax laws.

Safran Wins Employee Ownership Awards

The 60,000-employee French aerospace, defense, and security company Safran won the 2012 grand prize for employee stock ownership from the French Fédération des Associations d'actionnaires Salariés and the compensation and benefits prize from Observatoire des Rémunérations et Avantages Sociaux for its approach to global corporate citizenship. Jean-Luc Bérard, the company's vice president for human resources, said, "some 80% of our employees worldwide hold Safran shares...with employees holding 17% of our share capital and 25% of voting rights."

NCEO Board Election Opens on Monday

NCEO members in good standing will receive emails on January 7 with a link to the online ballot for the election for the NCEO's board of directors. The election will close on February 1. If you are a member and do not receive an email with a link to the ballot, please contact the NCEO.

Author biography and other columns in this series

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